1. Under the 110th section of the Internal Revenue Act of 1864,
as amended by the Act of July 13, 1866, taxing deposits in banks,
an entry made in the depositor's pass book of a deposit or payment,
is "a certificate of deposit," or "check," or "draft" within the
meaning of the section.
2. Under the proviso to that section, savings banks are not
exempt from taxation if they have a capital stock, or if they do
any other business than receiving deposits to be lent or invested
for the sole benefit of the person making such deposits.
3. The fact that, by an agreement between the savings bank and
the depositor, money deposited with the bank shall be reimbursed
only out of the first disposable funds that shall come into the
hands of the bank after demand, being a regulation adopted but for
an emergency, and not such as essentially impairs the just claim of
a depositor, does not change the case.
The German Savings and Loan Society, at San Francisco,
California, brought a suit in the court below against Oulton,
collector of internal revenue, to recover back a tax of 1/24th
Page 84 U. S. 110
of 1 percent per month, for moneys deposited in the savings bank
during the month of August, 1870.
The case was thus:
The 79th section of the Act of June 30, 1864, [
Footnote 1] as amended by an act of July
13th, 1866, [
Footnote 2]
enacts:
"That every incorporated or other bank, and every company having
a place of business where credits are opened by the
deposit . . . of money or currency subject to be paid . .
. upon
draft, check, or
order, or where money is
advanced or
loaned on stocks, bonds, bullion, bills of
exchange or promissory notes . . . shall be regarded as a
bank."
The 110th section of the same act as amended in the same way,
enacts: [
Footnote 3]
"That there shall be levied, collected, and paid a tax of 1/24th
of 1 percent each month upon the average amount of the deposits of
money, subject to payment by check or draft, or represented by
certificates of deposits or
otherwise, whether payable on
demand or at some future day, with any person, bank, association,
company, or corporation engaged in the business of banking."
But this section contains a proviso, thus:
"
Provided that the deposits in associations or
companies, known as provident institutions, savings banks, savings
funds, or savings institutions,
having no capital stock,
and doing no other business than receiving deposits to be loaned or
invested
for the sole benefit of the parties making such
deposits, without profit or compensation to the association or
company, shall be exempt from tax on so much of their deposits
as they have invested in securities of the United States, and on
all deposits less than $500 made in the name of anyone person."
With these enactments in force, Oulton, collector of internal
revenue at San Francisco, laid the aforesaid tax of 1/24th of 1
percent on the loan and savings institution named.
The society was organized under a statute of California, "to
provide for the formation of corporations for accumulations
Page 84 U. S. 111
and investment of funds and savings," &c. It had a capital
stock of $100,000, of which $60,000 had been paid in cash, the
notes of the stockholders being given for the balance.
The capital stock was a part of the security which the
depositors had. After paying expenses, 5 percent of the net profit
of the bank was set aside for a reserve fund, and then 10 percent
of the remainder set apart for the stockholders, who did not
otherwise share in the dividends. And the reserve fund and the
interest thereon was lent out and disposed of in the same manner as
the deposits, and was kept in the same manner as the capital stock,
as security for the depositors.
The bank received deposits, lent the money so deposited, and
repaid it, together with the dividends arising from the interest on
loans, to depositors, in accordance with the terms, conditions, and
plans stated in a prospectus issued by the bank to depositors in a
pamphlet, and an agreement thereto appended, which every depositor,
upon making a deposit, signed.
Among these terms and conditions were these:
"All moneys now or hereafter deposited by me, shall be
reimbursable only out of the first disposable funds that shall come
into the hands of the corporation, after the date of any demand for
the reimbursement thereof, and after payment of all sums for the
reimbursement of which demand shall have been made prior to the
date of my demand."
"The corporation will only engage to repay depositors when there
is money on hand which the board of directors may not deem it
necessary to reserve for other payments."
"When there is not money enough on hand to repay all the
deposits applied for, the directors shall make no new loans nor
investments until there is again sufficient money on hand to meet
the current applications; and if the demand shall, in their
judgment, become excessive or general, they shall have power to set
aside all applications previously made which may not have been
satisfied, and to order an apportionment of all the funds, as they
may be got in, and at such short intervals as they may
Page 84 U. S. 112
judge proper, among all the ordinary depositors, in proportion
to the amount of their deposits."
No money was received on deposit or held otherwise than upon the
terms and conditions thus set forth in the prospectus and
agreement.
No accounts had ever been opened or moneys received subject to
payment on draft, check, or order. When a deposit was made a pass
book was given to the depositor, and
an entry of the deposit
made in it and in the books of the bank. When the money was
drawn the depositor presented his pass book, received his money and
signed a receipt for it in the books of the bank, and an entry was
made in the pass book. When the depositor could not appear in
person to receive his money, he sent an order with the pass book,
and on the production of the pass book and order the order was
taken as a receipt and pasted in the receipt book in the place of
the receipt, and the entry made in the pass book. No such order was
ever paid without a presentation of the pass book with the order.
In practice, although not obliged to do so, the company always
intended to keep sufficient money on hand to meet all ordinary
calls when made, and it always paid upon call, so long as there was
money to do so. There had been one or two occasions when there was
a heavy demand for money, and when it had not been able to meet on
call all ordinary demands. Loans were usually made on real estate.
This was the company's regular mode and business; but when unable
to put all the deposits out on real estate, it lent them on other
securities, such as mint certificates, bonds of the United States,
state bonds, Oakland, San Francisco, and other bonds, San Francisco
Gas Company and Spring Valley Water Works Company's stocks. But
this was not the regular business of the company, and such loans
were but temporary. The company did not lend on bills of exchange,
or promissory notes without mortgages, and did not pay out money on
drafts or checks. It issued certificates for "term deposits" not
transferable, but the certificates were issued subject to the
foregoing agreement. The certificate when made out was cut from a
corresponding
Page 84 U. S. 113
stump, and before delivery the party receiving it signed the
receipt upon the stump, showing that it was received subject to the
conditions of the said agreement upon which deposits were
received.
As conclusions of law, the court found:
1st. That the company received no deposits of money subject to
payment by check or draft, or represented by certificates of
deposits, or otherwise, payable on demand, or at some future day,
within the meaning of the revenue acts of the United States.
2d. That the moneys deposited with it were not subject to the
tax assessed thereon and collected by the defendant.
3d. That the plaintiff was entitled to recover.
Judgment being entered accordingly in favor of the company, the
collector brought the case here.
Page 84 U. S. 116
MR. JUSTICE CLIFFORD delivered the opinion of the Court.
Associations engaged in moneyed transactions, whether
incorporated or not, having a place of business where credits are
opened by the deposit or collection of money or currency, subject
to be paid or remitted upon draft, check, or order; or where money
is advanced or loaned on stocks, bonds, bullion, bills of exchange,
or promissory notes; or where stock, bonds, bullion, bills of
exchange, or promissory notes are received for discount or for
sale, are regarded as banks, subject to taxation, under the
internal revenue laws which were in operation when the taxes in
controversy in the present suit were assessed and collected; but
the same section which created the liability and authorized the
assessment of the taxes, also provided that savings banks, having
no capital stock and doing no other business than receiving
deposits to be loaned or invested for the sole benefit of the
parties making such deposits, without profit or compensation to the
association or company, shall be exempt from tax on so much of
their deposits as they have invested in securities of the United
States, and on all deposits less
Page 84 U. S. 117
than five hundred dollars made in the name of anyone person.
[
Footnote 4]
Such taxes as are authorized by that act, to the amount of
$2697.84, were assessed against the plaintiffs by the assessor of
the district, and the record shows that they paid the same under
protest to the collector of the same district, and that they
instituted the present suit in the state court to recover back the
amount, which was duly removed, on motion of the defendant, into
the circuit court. Due appeal, it appears, was taken by the
plaintiff from the decision of the assessor levying the tax to the
commissioner, and the commissioner affirmed the action of the
assessor and decided that the tax was legally assessed. [
Footnote 5] Service was made, and the
defendant appeared and filed an answer, which amounted to the
general issue, and prayed to be dismissed with judgment against the
plaintiffs for his costs, which is a motion in the nature of a
demurrer. Hearing was had before MR. JUSTICE FIELD, and he denied
the application, holding that the plaintiffs, if they proved all of
the allegations of their complaint, would be entitled to recover.
Leave was subsequently granted to the defendant by the circuit
judge to amend his answer, and he accordingly filed the amended
answer which is exhibited in the record. Evidence was taken, and
the parties, having waived a jury, submitted the case, law and
fact, to the determination of the court, and the court rendered
judgment in favor of the plaintiffs for the whole amount claimed in
the declaration, and the defendant sued out the present writ of
error.
Three errors are assigned by the present plaintiff, in substance
and effect as follows.
(1) That the bank is not within the proviso exempting certain
savings banks from such taxation, as the bank had a capital stock
of $100,000, as stated in the finding of the circuit court.
(2) Because the bank did other business than receiving the
deposits to be loaned or invested for the sole benefit of the
depositors, without compensation to the association or company.
(3) Because
Page 84 U. S. 118
the deposits made in the bank are deposits subject to payment by
check or draft, or represented in a way to bring the bank within
the operation of the body of the section imposing the tax.
[
Footnote 6]
Unrestrained by the proviso, it is quite clear that the bank
would fall within the body of the section and be subject to the tax
which the section levies, as the managers of the institution have a
place of business where credits are opened
by deposit, or
collection of money or currency, subject to be paid or remitted by
check or draft, or represented by certificates of deposit. Attempt
is made to controvert the proposition that the money deposited is
represented by certificates of deposit, or that it is subject to
check or draft, but it is quite clear that the pass book furnished
to the depositor performs the same office as the certificate,
check, or draft, as between the person making the deposit and the
bank, showing to the entire satisfaction of the court that the
evidence brings the bank within the material words of the section,
and that the framers of the act intended to recognize the well
known fact that there are banks of deposit without authority to
make discounts, or to issue a circulating medium.
Banks in the commercial sense are of three kinds, to-wit: 1, of
deposit; 2, of discount; 3, of circulation. Strictly speaking the
term bank implies a place for the deposit of money, as that is the
most obvious purpose of such an institution. Originally the
business of banking consisted only in receiving deposits, such as
bullion, plate, and the like, for safekeeping until the depositor
should see fit to draw it out for use, but the business, in the
progress of events, was extended, and bankers assumed to discount
bills and notes and to loan money upon mortgage, pawn, or other
security, and at a still later period to issue notes of their own
intended as a circulating currency and a medium of exchange instead
of gold and silver. Modern bankers frequently exercise any two or
even all three of those functions, but it is still true that an
institution prohibited from exercising any more than
Page 84 U. S. 119
one of those functions is a bank in the strictest commercial
sense, and unless such a bank is brought within the proviso under
consideration, is equally subject to taxation as if authorized to
make discounts and issue circulation as well as to receive
deposits. [
Footnote 7]
Tested by these considerations it is clear that the judgment
must be reversed unless it appears that the bank is within the
proviso to the section which imposes the tax, and such was the
decision of this Court in a case involving the same question,
though it arose under the prior act of Congress levying internal
revenue duties.
Two propositions were decided in that case, which are directly
applicable to the case before the court, and the court is of the
opinion that the same principles should be applied in the present
case. They are as follows:
1. That savings banks which receive deposits and lend the same
for the benefit of their depositors, if the bank is under
obligations to repay the amount when demanded, agreeably to their
bylaws and charter, whether upon check, draft, or certificate of
deposit, are engaged in the business of banking within the meaning
of the body of the section imposing the tax, though the bank has no
capital stock and does no other business of banking.
2. That savings banks, described in the proviso and thereby
exempted from taxation, became subject to the duty imposed by the
body of the section on the repeal of the proviso, though they had
no capital stock, and neither made discounts nor issued currency as
circulation, nor transacted any business of banking except to
receive deposits, loan the same for the benefit of the depositors,
and repay the amount as aforesaid in pursuance of their bylaws and
charter. [
Footnote 8]
Apply those rules to the present case, and it is evident
Page 84 U. S. 120
that the only inquiry open is whether the plaintiff bank is
exempted by the proviso from the taxation which the body of the
section imposes.
Savings banks are not exempt from such taxation, except in
certain cases, nor are any entirely exempted unless they have
invested the whole of their deposits in the securities of the
United States, if any of the deposits made in the name of one
person amounted to, or exceeded, $500. Deposits in sums less than
$500, and all such as are invested in the public securities, if the
bank falls within the category described in the proviso, are exempt
from such taxation, but every savings bank which does not fall
within the category described in the proviso, is subject to
taxation the same as any other bank coming within the purview of
the act imposing the tax.
Such banks are not exempt from such taxation if they have a
capital stock, nor if they do any other business than receiving
deposits to be loaned or invested for the sole benefit of the
person making such deposits. Both of those conditions are expressed
in plain and unambiguous terms, and the lawmakers, as if to place
the second beyond cavil, provided not only that the deposits should
be loaned or invested for
the sole benefit of the
depositors, but added, "and without profit or compensation to the
association," showing beyond controversy that Congress did not
intend to exempt any savings banks from such taxation, except such
as were devoted to charitable purposes and were managed solely for
the benefit of the indigent, or of persons of small means.
Savings institutions undoubtedly exist which were established
solely for charitable purposes, and many of them are
conducted in the spirit in which they were established, as a means
of benefiting the indigent, and it is plain that Congress intended
to exempt all such from the taxation imposed by the body of the
section, but it is equally well known that there is another large
class of such institutions which are doing an extensive and
profitable business, and being the depositories of vast sums of
money are earning large profits,
Page 84 U. S. 121
which are as justly subject to taxation as the profits of any
other banking corporation in the country.
Power to lay and collect taxes is vested in Congress, and
Congress has enacted to the effect that all banks, except such as
fall within the category described in the proviso under
consideration, shall be subject to the tax imposed by the body of
the section, and it is clear that the plaintiff bank does not come
within either of the two conditions specified in the proviso, both
of which must concur in order that the bank may claim to be exempt
from the tax.
Argument to show that the bank does not come within the first
condition is certainly unnecessary, as it is admitted that the bank
has a capital stock of $100,000, of which $60,000 has been paid in
cash, and that the bank holds the notes of the shareholders for the
residue, the capital stock being a part of the security held for
the benefit of the depositors. Five percent of the net profits of
the bank is set aside as a reserved fund, and ten percent of the
remainder is set apart for the stockholders who do not otherwise
share in the dividends. It also appears that the reserved fund and
the interest thereon is loaned and invested in the same manner as
the deposits, and like the capital stock is kept as a security for
the depositors; that the bank receives deposits, lends the money
deposited and repays it, together with the dividends arising from
interest, in accordance with the terms and conditions stated in a
prospectus issued by the bank to the depositors and an agreement
thereto appended, which are exhibited in the record. Every
depositor, upon making a deposit, signs the agreement, and no money
is received on deposit or held otherwise than upon the terms and
conditions set forth in the prospectus and agreement. Accounts have
never been opened nor moneys received subject to payment on draft,
check, or order, nor has the bank ever issued certificates of
deposit, except such as were temporary, to give time to a depositor
to determine whether he will make a term deposit or one subject to
be drawn when wanted. When a deposit is made a pass book is given
to the depositor and an entry of the deposit is made in it
and
in the books of the
Page 84 U. S. 122
bank, and the money is drawn out by the depositor
on presenting the pass book or by a person
holding his
order. Money sufficient to meet all ordinary demands is always
intended to be kept on hand, and the bank always pays money upon
calls, and it appears that there has never been a time since the
bank was organized that it was not able to meet all ordinary
demands. Generally the bank asks the depositor to give a day or
more notice on large amounts, but the managers have never found it
necessary to make any rule upon the subject. Loans are usually made
on security of real estate, but in some cases upon bullion or
personal property, nor are any loans made upon bills of exchange,
promissory notes, or other evidences of private indebtedness.
Prompt payments have always been made, but the agreement contains
the stipulation that money deposited with the bank shall be
reimbursed only out of the first disposable funds that shall come
into the hands of the bank after demand, and the defendants refer
to that provision as distinguishing the case from the prior
decision of this Court, but the Court is of the opinion that the
proposition cannot be sustained, as the regulation is evidently one
adopted merely for an emergency, and that it was never intended to
control the general dealings of the bank with its depositors. Money
deposited in such a bank by one of its customers becomes a debt for
which the bank is liable, and it cannot be admitted that the
managers could lawfully adopt any rule which should postpone its
payment indefinitely. [
Footnote
9] They may doubtless make any reasonable rule under that
stipulation to enable them to raise means for such an extraordinary
occasion, but they could not refuse payment altogether or provide
for such delay as would essentially impair the value of the just
claim of a depositor. Throughout, the amount of the deposit would
continue to be a debt due to the depositor, demandable of the bank
on presenting the pass book, under such reasonable regulations as
the bank or its managers may adopt.
Page 84 U. S. 123
Prior regulations had been made in the reported case containing
our former decision which gave the depositor the right to make such
demand at four stated periods in the year, but in the case before
the court no regulation upon the subject has been adopted other
than what appears in the written agreement, which has never been
enforced. Whether it ever will be or not is a matter which cannot
be known, nor is such an inquiry of any importance in the present
case, as the court is of the opinion that the stipulation, inasmuch
as it has never become operative, cannot avail the plaintiffs in
this controversy.
Beyond all question the bank has capital stock, and inasmuch as
10 percent of it is set apart for the stockholders, it is not
correct to say that the business which the bank does in receiving
deposits and loaning and investing the same is done without
compensation to the association.
Viewed in the light of these suggestions it is clear that the
bank does not fall within the category described in the proviso,
and that the tax was legally assessed and collected.
Judgment reversed and the cause remanded with directions to
issue a new venire.
[
Footnote 1]
13 Stat. at Large 251.
[
Footnote 2]
14
id. 115.
[
Footnote 3]
Ib., 136.
[
Footnote 4]
14 Stat. at Large 115;
ib., 137.
[
Footnote 5]
Ib., 152.
[
Footnote 6]
14 Stat. at Large 136.
[
Footnote 7]
Bank for Savings v.
Collector, 3 Wall. 510; Angell & Ames on
Corporations (9th ed.), ยง 55;
Insurance Co. v. Ely, 2
Cowan 678; McCulloch's Commercial Dictionary 73-146;
Duncan v.
Savings Institution, 10 Gill & Johnson 309;
People v.
Utica Insurance Co., 15 Johnson 390; Grant on Banking 1-6,
381-614.
[
Footnote 8]
Bank for Savings v.
Collector, 3 Wall. 512.
[
Footnote 9]
Thompson v.
Riggs, 5 Wall. 678;
Marine
Bank v. Fulton Bank, 2 Wall. 252.
